Trusts in Divorce Settlements

Trusts in divorce settlements

When a marriage breaks down, quite apart from the emotional impact on both parties, in most cases there are many practical issues which need to be sorted out.

These include some of the following: where is each party going to live; what will be the arrangements for the children; is it necessary to change a will; is one party in need of financial support from the other; how are the rest of the finances to be resolved? This article deals with just one aspect, but a very important aspect, of the financial arrangements.

Many couples who separate are able to settle the financial arrangements. We will always encourage parties to try to reach an agreement and will help in the negotiations. Sometimes, however, even when advice has been taken, the parties remain unable to bridge the gap which would enable them to resolve matters without having to go to court for the case to be decided. One particular issue which sometimes causes very real difficulties relates to the treatment which should be given to financial assets which are held in trust.

It is usual that the assets in a trust are not immediately available to the party who is named as a beneficiary of the trust. What has to be decided is whether those assets can properly be regarded as part of the financial resources of that party. If they can, then they will be part of the assets to be shared in the divorce settlement.

There are various ways in which this problem concerning trusts can arise in divorce settlements. To take the most common example, perhaps one of the parties, let’s say the wife, has been made a beneficiary in the will of her father, who is still alive and in very good health. In our example, father is a wealthy widower, in his late sixties and has a life expectancy of, say, 15 years. In his will, father leaves his estate equally between his four children.

No one could seriously argue that the wife involved in the divorce proceedings was likely to inherit her share of her father’s estate in the near future (short of father having an unexpected fatal accident or an unpredictable illness). Further, as with all expectations of an inheritance, there is no guarantee that father will not change his will, for example, by leaving his estate to a new, much younger wife. Alternatively, by the time he dies, his estate may have been significantly reduced by extravagant living or expensive care costs.

In the above situation, any experienced solicitor would advise that the potential inheritance of the wife would be ignored by the court in arriving at a decision. The timing and amount of any benefit to be received by the wife from her father’s will is just too remote.

In the same family, the position for the parties to the divorce might be very different if the wife’s father had created a trust naming each of his four children as potential beneficiaries. Suppose that the trustees of the trust are truly independent and do not include any of the children. The trust deed stipulates that it is for the trustees to decide when, how and in what proportions the estate is to be divided between the four children. This is what is known, for obvious reasons, as a “discretionary” trust. How would the court approach the wife’s potential interest in the assets of the trust in dealing with the finances on the divorce?

The starting point would be that the court would recognise that the wife did not have a guaranteed interest in the trust assets but one which might materialise for her benefit but only if the trustees think fit. In this case, the court would want to hear evidence about various relevant factors, including any indications given by the father as to how he would like the trustees to consider the exercise of their discretion; whether any payments had already been made to any of the beneficiaries and if so, when and how frequently and in what sums; whether the wife has any particular financial needs which might influence the trustees in making payments to her.

Having heard all the evidence, the court would make a judgment as to the likelihood of the wife receiving funds from the trust and when such payment(s) might be made. The court would then assess the “fairness”, as between the wife, the husband and the other beneficiaries, of a sharing by the husband in any benefit which the wife could receive from the trust.

If there is a trust from which, in the above example, it could be predicted with certainty that the wife would receive a payment from a trust, the amount to be expected and when the payment might be made to her, then it is almost certain that that expected sum would be part of the sharing between the parties as part of their divorce settlement.

There is just one type of trust where there is no doubt that the court can treat the assets as being part of the divorce arrangements. Where a trust is established because of the marriage (known as a marriage settlement), then, if the marriage fails and there is a divorce, the court automatically has the power to decide whether the terms of the trust should be altered and if so, in what way. Continuing the example which was mentioned previously, if the wife’s father had created a trust on his daughter’s marriage, naming his daughter and her new husband as beneficiaries, the court could decide whether the proportions in which the beneficiaries could share the assets and the time when they could do so, should be altered to make more of the funds immediately available.

When a trust becomes part of the issues to be decided in a divorce settlement, the potential beneficiary of that trust who is a party to the divorce proceedings, must make complete disclosure of the existence, terms and history of the trust. Only then can the correct solution be found.

As is illustrated by the examples given here, the existence of trusts very often give rise to complex legal issues. Advice from an experienced professional is required. The usual question is “Will the assets of this trust be taken into account”? The short answer is that the more likely it is that one of the parties will benefit from the trust, the greater the chance that the details of the trust will have to be unravelled and be part of the overall financial settlement in the divorce.